The Committee members' median projection for GDP growth in 2019 was lowered to 2.1% from 2.3% and to 1.9% from 2.0% for 2020, while the outlook for the unemployment rate was also downgraded to 3.7% from 3.5% this year and to 3.8% from 3.6% for next year. Chair Powell commented that the updated projections "point to a modest slowdown, with overall conditions remaining favourable". Given that the fed funds rate is assessed to be around its neutral estimate, that in the Committee's view justified it being "patient in assessing the need for any change in the stance of policy".
As a result, the median projection now points to rates being left on hold through the remainder of the year, removing its implied expectation for 2 rate increases in 2019 that were projected at its December meeting. The median projection for 1 rate increase in 2020 was retained. In basic terms, that points to the fed funds rate now reaching a midpoint of 2.6% in 2020, whereas in December the projection was at 3.1%. Completing its dovish turn, the Committee announced that it would reduce its balance sheet run-off from $30bn to $15bn per month starting in May, before reaching an end in September at a terminal value likely to "be a bit above $3.5 trillion" according to Chair Powell. Slowing the pace of run-off and maintaining the balance sheet at that level is intended to ensure ample liquidity remains in the system to prevent financial conditions from tightening through higher market interest rates.
In the UK, it was another dramatic week in Brexit developments. An expected third 'Meaningful vote' on PM Theresa May's Brexit deal was knocked back by the Speaker of the Commons under an obscure and historical convention of parliamentary procedure. PM May, then, on Wednesday wrote to European Council President Donald Tusk formally requesting an extension to Article 50 of the Brexit deadline set at March 29 until June 30, 2019. On Friday morning local time, President Tusk announced that the EU 27 leaders had agreed to an extension, though the details are somewhat complicated. If over the next week the UK Parliament is able to approve the existing Brexit proposal, the withdrawal will take place on May 22. However, if that approval is not forthcoming, the UK has until April 12 to outline to the EU how it plans to proceed. All scenarios remain open up until that new cliff-edge date of April 12 including; an exit with a deal, a no-deal exit, a long extension to the withdrawal date or effectively a cancelling of Brexit by revoking Article 50.
Given the persisting uncertainty, the latest policy meeting from Bank of England (BoE) held during the week saw rates on hold as expected, with commentary heavily focused around Brexit, highlighting that "the economic outlook will continue to depend significantly on the nature and timing of EU withdrawal". Regardless of the outcome, the BoE pointed to a weakening in confidence and in short-term activity, driven by reduced business investment, as the impacts on the economy from Brexit. However, it noted that a strong labour market had helped to moderate those headwinds. The BoE retained the line that its policy response to Brexit "will not be automatic and could be in either direction".
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Turning to the domestic focus over the week, the Reserve Bank of Australia's (RBA) March meeting minutes provided several points of interest. The key development was that the Board had identified 'tension' in the domestic data flow, specifically that the labour market had been improving despite slowing momentum in economic growth. The March meeting took place the day before Q4's National Accounts were released, where the Board had anticipated output growth to be "a little lower" than the 2.75% (year-on-year) that it had forecast in February's Statement on Monetary Policy". Q4's growth outcome of 2.3% was potentially below that guidance, though its expectation for "a markedly slower pace of growth in the second half of 2018 than in the first half" was confirmed.
In spite of slowing growth, due mainly to weakness in household consumption and residential construction, the minutes noted that forward-looking indicators had "pointed to further tightening in the labour market in the near term". How this situation plays out is key and as the Board later indicated, it will await further data before reaching a firm assessment given the uncertainties involved. For the moment, the Bank's guidance is 'neutral' by continuing to note that scenarios under which the cash rate could increase or decrease "were more evenly balanced than they had been over the preceding year". The Board, however, gave a clear indication that it will take a data dependent approach by noting that "members agreed that developments in the labour market were particularly important".
To that end, Thursday's Labour Force Survey for February was keenly anticipated by the markets, though it ultimately provided few clear signals — in either direction (see here for our full review). Employment lifted by a softer-than-expected 4,600 in the month on a seasonally-adjusted basis (vs median forecast for +15,000), but the national unemployment fell to its lowest level since June 2011 at 4.9%, as workforce participation declined.
Given those conflicting signals, the trend series data perhaps offers a better guide. On that basis, both the unemployment (5.0%) and participation (65.6%) rates continued to remain unchanged from recent months, though monthly employment growth has softened recently, as shown in our chart of the week (below) to around 22,000 in the month. That level is still solid and above what is generally required to prevent the nation's unemployment rate from rising, but a continuation of that trend would likely change that situation and will only increase the importance of forward-looking indicators of labour market activity (such as vacancies and hiring intentions) for markets in the near-term.
Chart of the week
The housing market is rarely far from focus and this week, there was a speech from the RBA's Michele Bullock (see here) which highlighted that the combination of household indebtedness and declining property prices over the past year were not regarded as significant enough to be raising financial stability concerns. Lastly, the ABS reported capital city property prices declined by 2.4% in Q4 and by -5.1% through the year (see our analysis here).
Given those conflicting signals, the trend series data perhaps offers a better guide. On that basis, both the unemployment (5.0%) and participation (65.6%) rates continued to remain unchanged from recent months, though monthly employment growth has softened recently, as shown in our chart of the week (below) to around 22,000 in the month. That level is still solid and above what is generally required to prevent the nation's unemployment rate from rising, but a continuation of that trend would likely change that situation and will only increase the importance of forward-looking indicators of labour market activity (such as vacancies and hiring intentions) for markets in the near-term.
Chart of the week
The housing market is rarely far from focus and this week, there was a speech from the RBA's Michele Bullock (see here) which highlighted that the combination of household indebtedness and declining property prices over the past year were not regarded as significant enough to be raising financial stability concerns. Lastly, the ABS reported capital city property prices declined by 2.4% in Q4 and by -5.1% through the year (see our analysis here).
